CO2 Restriction Easing on Coal-fired Power Plants? (BTU, ACI, MEE, CNX, FTEK)

Last August, the US Environmental Protection Agency (EPA) ruled that a proposed coal-fired power plant in Utah did not need to file for a clean-air permit because the emissions from the plant were not regulated pollutants under the Clean Air Act. Carbon dioxide, which all of us expel every time we exhale, is not a pollutant under the EPA regulations. Thus, if a power plant is going to emit carbon dioxide, it’s just breathing.

Needless to say, environmental groups have already challenged thisruling, and an environmental appeals board has directed EPA to re-thinkits ruling on carbon dioxide. But until the EPA completes its review,any new coal-fired power plant can be built without any control ongreenhouse gas emissions.

This is temporarily good news for coal producers, which could use somegood news. Peabody Energy Corp. (NYSE:BTU) closed recently off nearly75% from 52-week highs. Arch Coal Inc. (NYSE:ACI) is off nearly 80%,Massey Energy Company (NYSE:MEE) is off nearly 85%, and CONSOL EnergyInc. (NYSE:CNX) is down about 75%.

Nearly everyone expects the incoming Obama administration to mandatesignificant reductions in greenhouse gas emissions, which would almostcertainly mean a reduction in coal burning. But coal produces nearly50% of US electricity, and, as with gasoline for transportation, thereis no cheap, quickly-implemented alternative. The only fuel that couldpossibly replace significant amounts of coal-generated electricity isnuclear. And nukes may be even more controversial than coal.  There isalso the notion that piling on extra costs on to companies (andultimately to consumers) right now when everyone is strapped will onlyhurt the economy further.

That leaves "clean coal," which is more of a promise than a reality.Essentially, clean coal burning implies capturing the greenhouse gasemissions before they go up the stack and then storing the capturedemissions somewhere. Carbon sequestration is touted as the solution foreither storing CO2 indefinitely or  until the CO2 can be used insecondary recovery of US crude oil.

Fuel-Tech, Inc. (NASDAQ: FTEK) offers boiler optimization, and airpollution reduction and control solutions.  It has been unable tomaintain being a successful stock story, but it is probably chomping atthe bit for whatever cleaner and more efficient mandates come down.

The catch is that not every existing power plant is built near apotential CO2 storage site. In fact, most aren’t, which is the biggercatch. New coal-fired plants built near suitable geology will likelynot be near the power grid, which means new transmission lines.

The biggest catch though is how the US chooses to tax carbon dioxideemissions. A straight-forward tax is unlikely because politiciansdislike taxes, so that leaves the various cap-and-trade schemes. Butany tax on CO2 emissions will ultimately be paid by consumers, whichwill be unpopular as well.

There is no simple, clean, quick alternative to coal. In the near-term,nothing will replace it. That’s probably good news for the producers.The bad news is that the US sits on so much coal that pricing pressurewill always be a factor.

Paul Ausick
December 22, 2008